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Despite the continued escalation of tensions and conflicts in the Middle East and the diversion of LNG cargoes away from the Red Sea, natural gas prices in Europe and spot LNG prices in Asia have dropped to the lowest levels in years and months, respectively, even during peak winter season.
Asian demand for LNG has rebounded this winter season, following weaker-than-expected import demand in the 2022/2023 season, while gas inventories in the region are relatively high. This would help the biggest Asian buyers, China, Japan, and South Korea, weather global LNG supply risks this heating season, analysts say.
Europe is in a good position to finish this winter without major disruptions, too, thanks to steady pipeline flows from its top supplier, Norway, and sufficient LNG imports, especially from the United States.
The confidence that Europe and Asia will go through the winter without much trouble is reflected in the benchmark European natural gas prices and in the Asian spot LNG prices.
Both have slumped this week to multi-month lows, despite the fact that it is peak winter season and despite the global traffic chaos as LNG vessels are turning away from the Red Sea/Suez Canal route and diverting to a 10-day-longer voyage via the Cape of Good Hope in Africa.
Red Sea Traffic Chaos
LNG has been affected more than any other commodity by the en masse exodus from the Red Sea, following the escalation of tensions with the Iran-backed Houthis attacking commercial vessels and the U.S. and UK targeting Houthi positions in Yemen and shooting down Houthi drones and missiles in and around the Red Sea.
It now appears that LNG tankers have halted all travels via the Suez Canal and the Red Sea, according to vessel-tracking data compiled by Bloomberg.
Early this week, ship-tracking data noticed that Qatar, one of the world’s top three LNG exporters, had paused LNG shipments through the Red Sea due to security concerns.
Qatar’s LNG cargoes via the Red Sea/Suez Canal route have been bound for Europe.
Qatar sent a little more than 20 bcm of LNG to Europe last year, accounting for 16% of total European LNG imports, ING strategists Warren Patterson and Ewa Manthey wrote in an analysis this week.
There are also some marginal volumes from Oman and the UAE. Middle Eastern LNG supply to Europe would all pass through the Red Sea and Suez Canal, they noted.
“If the situation deteriorates, it may lead to some disruptions and longer shipping times in the short term – but where there is flexibility, it’s expected that we’d see shifts in trade flows,” ING’s strategists added.
The most likely trade flow changes would be U.S. LNG bound for Asia to be re-routed to Europe, while more Qatari LNG would move into Asia instead of Europe.
“In doing this, these flows will avoid the Red Sea and will not have to take the longer route around South Africa,” ING said.
The market is currently shrugging off a major supply risk, evident in both LNG freight rates and LNG prices.
Diverting via the Cape of Good Hope from the Persian Gulf to northwest Europe adds only $0.09 per million British thermal units (MMBtu) to the freight cost compared to the Suez Canal route due to Suez Canal savings, but increases laden voyage time by 9.5 days, Spark Commodities has estimated.
Meanwhile, the front month DES LNG price in northwest Europe, at $8.883/ MMBtu, is at its lowest since the summer of 2023, the LNG freight rates tracking firm said.
European Gas Prices Tumble Despite Supply Risks and Cold Snap
The front-month February Dutch TTF Natural Gas Futures, the benchmark for Europe’s gas trading, plunged by 6% to $30.30 (27.795 euros) per megawatt-hour (MWh) at trading close on Wednesday. That’s the lowest price in more than two years, reflecting higher-than-usual inventories and weaker gas demand from industry.
The prices have largely ignored the deep freeze of the past weeks in most of Europe and the Red Sea LNG traffic halt as traders believe the market is well supplied to finish this winter season – which we are now halfway through – with sufficient natural gas in storage sites. As of January 16, EU gas storage sites were 77.9% full, according to data from industry group Gas Infrastructure Europe. That’s well above the 5-year average of 68% full for this time of year.
“Soft demand is expected to continue throughout 2024 and coupled with steady supply from Norway and LNG imports leaves markets facing few upside pressures for prices,” analysts at BMI Research wrote in a report carried in The Wall Street Journal.
Analysts at Engie’s EnergyScan analytics unit said on Wednesday that “Despite a cold snap hitting Europe, gas and power prices continue to fall in January. A comfortable supply demand balance and favorable weather forecasts contribute to the decline but geopolitical risks remain in the background.”
Despite the Qatari LNG re-routing, “Europe is well placed to deal with disruptions, with its gas storage still very high for the time of year, and much better positioned than two years ago when Russia started its war with Ukraine,” Alex Froley, an LNG analyst at ICIS, wrote earlier this week.
Asian Spot LNG Price Drops to Seven-Month Low
Asia is well positioned to not see shortages or spiking spot LNG prices for the rest of the winter, too, despite a rebound in LNG imports in recent months.
Ample inventories in Asia, as well as in Europe, continue to put downward pressure on Asia’s spot LNG prices, which fell for an eighth straight week in the week to January 12. The average LNG price for February delivery into northeast Asia slumped by almost 10% in one week to $10.10/MMBtu in the week to January 12, per industry sources cited by Reuters. That’s the lowest spot LNG price in Asia in seven months since June 9, 2023.
